on exchanges. This wouldensure more accurate tradereporting and make the mar-ket’s liquidity more evident.”“I think there’s a riskof overreliance on RFQs,as in more liquid ETFson-exchange tradingshould be cheaper overtime than using an RFQ.Asking people to commitcapital via the RFQ alwayshas a cost,” adds SimonBarriball, European headof ETP trading for agencybroker ITG, which operatesRFQhub.

Exchanges respond

Exchanges are responding
to the growing market share
of electronic RFQ platforms
by launching their own
initiatives to attract block
trades, emphasising the
benefits of the automatic
post-trade transparency and
central clearing that come
as standard with exchange-based execution.

In April 2016 theGerman stock exchangeintroduced a new ordermechanism designed towhere necessary, to collater-alise the trade with the assetmanager pre-settlement.”Despite RFQs’ origins inthe block trading market,smaller investment firmsare also now turning tothem for trade execution.

“Smaller clients may
need to pay commissions to
a broker to access the stock
exchange or pay for a direct
market access line,” explains
Simon McGhee, head of ETF
Advisory EMEA at market
maker Bluefin Trading.

“A desktop link to anRFQ platform can offercheaper execution, plusthe prospect of the marketmaker beating the on-exchange spreads.”However, seeing smallertrades routed via electronicRFQs in this way isn’toptimal for the ETF mar-ket’s development, arguesMcGhee.

“This isn’t helping the
industry grow. We’d like to
see RFQ platforms reserved
for larger block trades,
say over €1 million in size,
with smaller orders traded

RFQ by size segments

In a 2014 study, RFQ operator Bloomberg Tradebook
argued that, on average, it’s
cheaper to conduct trades
in an US ETF on-exchange,
using an algorithm, if the
trade size is smaller than

1 percent of the average
daily trading volume. For
trade sizes exceeding that
threshold, OTC block trading has a lower cost, says
Bloomberg.

One large European asset
manager told the Trade that
it segments its ETF orders
by size for execution, following a similar logic.

“We trade smaller ETF
orders using an agency
broker on-exchange,” said
the head of ETF execution
at the asset manager, who
requested anonymity.

“For medium-sized
orders we use electronic
RFQ platforms 99% of the
time and for large orders
we trade mainly over the
phone and on the basis of
the ETF’s NAV. That helps
us limit the likelihood of